Good day and welcome to the Cardinal Health Inc. First Quarter Fiscal Year 2022, Earnings Conference Call. Today's conference is being recorded. At this time. I would like to turn the conference over to Kevin Moran, Vice President of Investor Relations. Please go ahead.

Good morning and welcome. Today we will discuss Cardinal Health First Quarter Fiscal 2022 results. You can find today's press release and presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Mike Kaufmann, Chief Executive Officer, and Jason Hollar, Chief Financial Officer. During the call, we will be making forward-looking statements. The matters addressed in these statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statements slide at the beginning of our presentation for a full description of these risks and uncertainties. Please note that during our discussion today, our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliation for all relevant periods can be found in the schedules attached to our press release. During the Q&A portion of today's call. We please ask that you try and limit yourself to one question so that we can try and give everyone an opportunity. With that, I will now turn the call over to Mike.

Thank you, Kevin. And good morning, everyone. Our first-quarter results were in line with our expectations. As we continue to manage through the global pandemic, we're staying focused on the near-term priorities and long-term strategies to drive growth and momentum across our businesses. In Pharma we continue to see sequential volume improvement, and are encouraged by the profit growth that we saw in the first quarter. We believe our Pharma business, inclusive of our strategic growth areas of specialty, nuclear and outcomes is well-positioned for growth in FY’22 and beyond. Our Medical segment continues to be impacted by the disruptions in the global supply chain that we called out last quarter. Recently, these pressures have rapidly escalated, and we are experiencing significantly elevated product costs due to international freight and commodities. While we believe the majority of these elevated supply chain costs are temporary, we do not expect them to return to normalized levels this fiscal year. As a result, we are lowering our FY’22 outlook for Medical segment profit to adjust for these increased headwinds. We are taking actions to mitigate these impacts across the enterprise. And we're reaffirming our FY’22 EPS guidance of $5.60 to $5.90 per share. We have been on a journey to simplify our portfolio and strengthen our core businesses, so we are positioned for broad-based sustainable growth as noted in the long-term targets we are announcing today. We are prioritizing investment in our strategic growth areas, and in innovative solutions to meet our customers needs today and tomorrow. And with our improved balance sheet, commitment to our dividend, and now an additional $3 billion share repurchase authorization, we are positioned to return capital to shareholders. Looking ahead, we remain confident in our strategy. Now, I'll turn it over to Jason to discuss our results.

Thanks Mike and good morning everyone. I will review our first-quarter results and updated expectations for fiscal '22 before closing with some comments on capital deployment. Beginning with total Company results, first quarter revenue increased 13% to $44 billion driven by sales growth from existing customers. Total gross margin decreased 4% to $1.6 billion driven by the Cordis divestiture and the net impact of elevated supply chain costs in Medical. As a reminder, the sale of Cordis was completed in August second and impacted the quarter's results by approximately two months. SG&A increased 1% reflecting information technology investments in higher costs to support sales growth, partially offset by the Cordis divestiture and benefits from cost savings initiatives. Overall, first quarter operating earnings track in line with our expectations, down 15%. Moving below the line, interest and other decreased by $2 million driven primarily by lower interest expense from continued debt reduction actions. During the first quarter, we exercised a make-whole call provision to redeem $572 million with outstanding June 2022, debt maturities. We continue to expect to repay the approximately $280 million of remaining June 2022 notes upon maturity. Our first quarter effective tax rate was approximately 24%. Average diluted shares outstanding were 289 million, about 4 million shares fewer than the prior year. This reflects prior year share repurchases, as well as the $500 million share repurchase program initiated in the first quarter and recently completed. The net result for the quarter was EPS of $1.29. We ended the first quarter with a cash balance of $2.5 billion and no outstanding borrowings under our credit facilities. This cash balance also reflects our first annual settlement payment into escrow under the proposed opioid settlement agreement. Now, turning to the segments beginning with Pharma on Slide 5. Revenue increased 13% to…

Thanks, Jason. Throughout the pandemic, we have responded to challenges with resilience and agility, approaching every situation with a focus of delivering for our customers. So they can care for their patients. We're continuing reviewing our business and seeking areas to improve as we navigate the dynamic macroeconomic environment. We are taking action to mitigate elevated costs and manage through temporary supply chain disruptions in medical. These actions include pricing, adjustments, cutting additional costs throughout the organization and accelerating additional growth opportunities. Outside of a continual focus on the customer, we are directing our efforts to 3 main areas that will support our long-term target of mid single to high single-digit growth for the medical segment. First, we are simplifying our operating model. We continue to take decisive action to reposition the business for growth. We divested the Cordis business, and have begun significantly reducing our international commercial footprint. We have announced and are in the process of exiting 36 initial market, which will allow us to focus on the markets where we have a competitive advantage. Additionally, we are further streamlining our medical manufacturing footprint and modernizing our distribution facilities. We expect these simplification initiatives to contribute to our $750 million enterprise cost savings target, and position us to generate sustained long-term growth. Second, we are focused on driving mix through commercial excellence. Our Cardinal brand portfolio has significant breath, with leading brands and clinically differentiated products such as Kendall Compression, Kangaroo Enteral Feeding, and Protexis surgical gloves, among others. While we have made important changes to align our commercial organization structure and incentives, we recognized that we are underpenetrated in Cardinal Health brand mix relative to our potential. An increase in private label penetration across the U.S. in in-channel customer base, represents a significant profit opportunity, with even…

Thank you [Indiscernible] [Operator Instructions]. We'll pause for a moment to assemble the queue. And our first question will come from Lisa Gill with JPMorgan, please go ahead.

Thanks very much. Good morning, Mike and Jason and thank you for all the comments. Mike, I just want to go back to your comments around simplifying the operating model on the medical supply side, and, where you talked about driving the mix of Cardinal branded products. One, can you remind us what percentage of sales say are Cardinal branded products. And then 2, can you talk about the margin differential on those products? And then my third and last question would just be that, now that you have the divestiture of Cordis behind you -- the sale of Cordis behind you, are there other assets within Medical that would make sense to divest?

Thanks, Lisa. Thanks for the question. Tough questions to answer, because these aren't things we have historically given. Obviously I can say this. We believe there is plenty of room to grow. Some of our accounts were significantly penetrated in and others obviously were less penetrated in. So we do have good target by account that we're going after. So we think there's plenty of opportunity in there. It's one of the key reasons we believe in our longer-term guidance for Medical is the fact that we can do that. As far as margin rates go, generally, they are much more higher as a percentage and dollars and national brand. There are times and certain preferred brand programs, which is why we have them that we do prefer national brand. But in general, as a rule of thumb, our margin rates are much more significant on our Cardinal sourced or Cardinal manufactured products. And then lastly around Cordis, we're always looking at our entire portfolio of businesses to make sure we have the right type of businesses where we are positioned to win. There's nothing that sticks out to me in terms of a certain product category or that, but we are, as I mentioned in my prepared remarks that we are exiting 36 countries. So not only do we look at products, we look at products by country and countries, and where we don't believe we have significant growth opportunity, whether it might be too much risk versus benefit, etc. We have made real conscious decisions to aggressively manage the number of countries and which is why we are exiting 36 countries to help simplify the model.

All right. And up next, we will take a question from Charles Rhyee with Cowen. Please go ahead.

Yeah. Thanks for taking the question. Mike and Jason, I want to just talk a little bit about the long-term growth targets a little bit here. I guess first is when we're starting the jump off point for these -- for the earnings and earnings growth, are you starting from fiscal '22. And is that a 5-year target that we should be thinking about or are we jumping off from fiscal '21 as the baseline year? And then secondly, within that, can you just remind us again, what the -- obviously the earnings this year are back half-way -- just remind us what the tailwinds that we should be considering as we build our model for the remainder of this fiscal year. And then lastly, those higher freight and shipping costs, do you assume those go away after this year as we think about it in relation to the long-term targets? Thanks.

Hi. Good morning, this is Jason, I'll try to capture all those points. Your question is certainly fair as it relates to trying to define the baseline for those longer-term targets. As we indicated in the remarks today, we do anticipate this additional $100 million to a $125 million related to the inflationary environment as temporary. It's difficult certainly to define exactly if that's short-term, medium-term, or longer-term. And at the current moment, we would expect those to revert back to some normalized level in a time frame that is relatively short to medium term. And so when we talk about these longer-term targets, we are not presuming that type of tailwind, right. So it isn't a more normalized state when we provide those targets. You referenced 5-year, so I'd say 3 to 5 years is a reasonable type of time frame for average types of performance levels, to get a broad perspective on the ins and the outs, but we would not expect big shocks associated with items like that, divestitures and acquisitions, things that nature would also be normalized out of that so that we're getting at that core type of performance. And then as it relates to more specifics around elevated supply chain cost, we highlighted within our remarks that its really just two key areas; the international freight and the commodities. In both cases, the reason we believe that they are temporary is that they are at multiple levels higher than what we've historically seen on international freight, which is essentially the cost of getting a shipping container shipped from overseas locations such as Asia to the U.S. We're seeing that cost up 8 to 10 times versus pre -COVID levels. Certainly we would expect that to be significantly lower at some point in the future.…

And next question will come from Eric Percher with Nephron Research, please go ahead.

Thank you. Appreciate the supply chain commentary. I'd like to get a little bit deeper here. We used to have guidance on commodity impact. So I think anything you can provide relative to $17 [billion] (ph) of revenue or the cost that you incur to give us some sense there. And then thinking about commodity and freight, what is clearly passed along versus what represents a decision that has to be made? And what I'm really looking for is $100 million to $125 million of increased expense. What does that represent relative to the total expense that you're seeing passed through?

Yeah. Thanks for the question. So let me see if I could help. First of all, we as you know, called out in our fourth quarter of last year that we did expect elevated supply chain costs. So in our guidance for this year for the medical segment, we already assumed a certain amount of elevated supply chain costs, some of which we have plans already to offset through cost reductions, pricing actions, and those types of things, and that was originally built-in. What we saw during the quarter, particularly as the quarter went on, was a significant increase in those supply chain costs, most notably in international freight, high containers that we talked about, as well as commodities. And those we feel will create an incremental $100 to a $125 million of costs for us. Roughly, I would say that $100 to a $125 is split relatively evenly between the impact of commodities and the impact of freight costs. So they were both very, very significant and we saw other minor ones in other areas, but those were the really 2 big ones, both of which we believe are temporary because 1. as Jason said earlier, they are at all-time highs for the most part, significantly higher than where they were and we believe that over time, the market will adjust and those will be able to come back down. So what are we doing about that? That is a net number, the $100 to $125 obviously since we called that out as the adjustments of Medical guidance, is that we are getting after it through pricing actions, passing some of it through. It's hard to really talk about exactly which once you can pass through or not. The market is very complicated. There are contracts that we have to work through. We have to work with our partners, both the hospitals and the GPOs. We have to understand the supply and demand dynamics of each item in the environment. And so we are working through and understanding all of those factors but there is some additional pricing action built into that number. And then obviously since we maintain guidance for the entire Company, we are taking aggressive cost actions across the Company. We are leveraging our improved balance sheet. And we're also focusing on our growth businesses, and pushing our teams to do more faster there. So those are some -- I hope some helpful comments.

And the only thing I'd add is that this increase is not -- it's related to 2 parts. It's a greater increase in both of these areas of international freight and commodities, but it's also longer expected duration. We had anticipated that they would come back to more normalized levels a bit earlier. So we saw a higher spike and a longer duration. And in terms of just how you model it through on revenue, I'd like to draw -- just draw a little bit of distinction. With PPE, we saw many, many times higher total impact on that product cost, and so we saw a much more significant number of dollars in both cost and revenue that came through. While this is still significant, it's much less meaningful from a revenue perspective, and is not moving that needle nearly as much. Next question.

And next we'll hear from Kevin Caliendo with UBS. Please go ahead.

Thanks for taking my question. So if I'm doing the math right, it appears that the bad guy that is the incremental supply chain costs is larger than the good guy, the lower share count, and perhaps the lower tax rate. Am I doing -- am I thinking about that right. And the fact that you didn't change guidance, is that just you're still within the range but maybe it's the lower end of the range or you were just giving yourself a little room. How should we think about that?

Yeah. I think your math is accurate for the items that we typically provide guidance. One area that's not explicitly called out but is implied is just the underlying other corporate expenses. And as we referenced a few times already in Mike's specific comments, there's broad-based cost reductions, the $750 million program which we increased by $250 million last quarter, is enterprise-wide and that includes the corporate function. So we have identified additional corporate cost reduction actions that are not included in either of the segments, but do fall through to the bottom line, the total segment profit as well as our earnings per share.

Next question, please.

And next we'll hear from Michael Cherny with Bank of America. Please go ahead.

Good morning. I want to dive a little bit more into some of the long-term guidance and concurrent contrast that with the dynamics you're seeing right now in terms of supply chain. I know that a lot of these are already control and clearly, some companies in the space are seeing similar approaches. That being said, as you think about the ways you interact with your customers now, and interact with your partners and supplier partners, are there any ways that you can continue to evolve your business so that maybe we don't see ever spikes like this. But some of the fluctuations and volatility that you have seen at the supply chain in the past. And I'm thinking particularly on some of the raw material cost spikes that do come up from time-to-time. Are ways that can be mitigated in a more systematic fashion going forward so we don't have this level of volatility and [Indiscernible] surprise for stuff that, as I mentioned, a lot of it is -- tends to be out of your control.

Yeah. I really appreciate the question. It's a really good one. So let me step back and hit a couple of different pieces, and I'll finish with your question on medical, but I'll take a shot here to emphasize a few others. So there's really, I would say, 3 obviously components to our long-term target, which our long-term target we're talking about is having a double-digit combined EPS growth and dividend yield on averages as Jason mentioned. In Pharma, the -- to your point, we don't really see those fluctuations in commodities and costs affecting their business generally, because if it does, it generally happens in the form of the drugs having increases, which in that model, are able to be passed on and work through the model. And so our goal of low single-digit to mid-single-digit growth in Pharma is really focused on strengthening that [Indiscernible] balance, getting that right mix of generics, making sure we're managing the balancing through of our margin initiatives and all that as well as then driving our growth businesses, specialty nuclear in out comes, and we gave some color on those. Hopefully, you found helpful and exciting for instance nuclear doubling in the next five-years especially, continuing and outcomes continuing with double-digit growth. We believe the combination of getting that PD business stabilize, which we're seeing and then seeing the growth there is really what's going to drive that. And then of course we mentioned in the use of capital being able to having our debt lower commitment to our dividend, and then the share repurchases. On medical as you mentioned, it's a couple of different things that simplify our operating model, focusing on driving mix and filling our growth businesses. I won't go into those details because we did in the comments.…

And our next question will come from Jailendra Singh with Credit Suisse. Please go ahead.

Hi. This is Adam on for Jailendra today. Thanks for taking the question. Going back to your long-term growth targets, just wondering if you take into account the capital allocated to the anticipate opioid segment payments or how we should be thinking about that potential impact as it relates to being able to invest across some of your growth and higher-margin businesses?

Yes. Good morning, Adams, Jason. Yes. That would incorporate that as we think about the capital deployment side of that. We have for quite some time now included in an expectation of what those payments would be. That's all based upon our current set of assumptions, of course that I would change materially, and that would change your answer, but based upon what we know now, that would be the baseline, for example, the $3 billion share repurchase authorization that we have just completed is inclusive of that as well, as a part of the capital outlay that we would expect over that period of time, and this would be the available capital beyond that. Next question.

And up next we'll take a question from Steven Valiquette with Barclays. Please go ahead.

Hi. Thanks. Good morning, everybody. Just a question on the Medical segment. You mentioned that despite some impact from the Delta variant, that the total elective volumes exited the quarter near 95% of pre -COVID levels. I guess I'm curious if there's any updates on your assumptions for the pace of return to procedures for the remainder of fiscal '22. Is this also a positive factor that helps to offset some of the negatives that you discussed within the Medical segment. Thanks.

Yeah. The -- there was a little bit of a reduction in that base -- in that level of elective procedures in the first quarter. We started the quarter at close to pre -COVID levels. And as we indicated, we exited in the back at about 95%. And we think that's primarily attributed to the Delta variant. So we see that trending in the right direction. And with the pace of the virus since then, we feel that will continue to improve. And importantly, what we saw in the quarter is we saw an improvement in our Lab business that effectively offset that modest deterioration in the amount of elective procedures. So what we're seeing right now is that those two items tend to generally offset both good and bad depending upon the pace of the virus. So it's nothing significant that we saw in the quarter and as a result, we don't anticipate there being wild fluctuations going forward. Next question.

And next we'll take a question from Stuart Hill with Deutsche Bank. Please go ahead.

Good morning, guys and this is the second time this earnings season has been [Indiscernible] Jason and Mike, just a quick question on the long-term guide, which is, over the long term, how do you think about the underlying operating earnings growth contribution versus the capital deployment or inorganic growth contribution?

I think if you -- as you break down the long-term targets, when we were really talking about Pharma being low single-digit to mid-single-digit growth, we're really talking about the operating earnings of that segment being in the low-single to mid-single Medical being in mid-single to high single digit. And then the rest of it would come from our dividend yield, as well as capital deployment around REPO to get to the double-digit combined EPS growth and dividend yield. So the guidance on medical and foremost really about operating earnings and I would also say that M&A is not a top priority and that that may occur, and we may have some of that here and there. That is one option with capital deployment. But this is really more focused on what we talked about, operating earnings growth as well as dividend yield and opportunistic repo. Next question.

All right. And our last question will come from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Good morning, so on the long-term double-digit growth, I know you talked about the growth rate being sort of on a normalized basis. So should we take that long term double digit growth back out from 2020 to guidance sort of the abnormal costs that you are seeing, normalized for them and then apply that growth rate to get to 2023. That's the first part of the question and then secondly, as we think about these transitory costs in nature. You talked about a $100 to a$ 125 million costs related to the supply chain. What's the contribution of labor cost to that headwind? Because when we think about labor costs, we think about it as potentially more structural because once you raise someone salaries, it's difficult to bring it back down. So how should we think about that component within the additional cost?

Sure. Good morning, Ricky. This is Jason. I'll start. As we talked about our long-term target, it's not expected or intended to be each and every year. There's a reason that we do a highlight that is an average over that period of time. So we're not providing fiscal '23 guidance with the statement. With that said, we think that there are over these longer periods of time that these would be the primary drivers and expectations we would have for our businesses. And how you described at about the normalized level as an example that 100 to 125 five were -- we indicated that we anticipate these costs remain elevated for the balance of fiscal '22, we're not taking a position at this point as to how much, if any, carries over into fiscal '23, that is a terrific example of an important element of fiscal '23 guidance that we will provide in the future that is not at this point something that we feel comfortable being able to identify. And then your question about labor is a great one. We did not call it out because it is very consistent with what we had last quarter. So while labor, inflation, and those pressures are very real for us, like the whole industry, we are not seeing anything new and unique this quarter versus last quarter, and so we're not adding in any additional costs for that. But I would also highlight that even what was included in the original guidance was not nearly as substantial as the cost that we're referencing for and what was included before for commodities and international freight. Those are clearly the most significant items that drive that fluctuation, and items like labor as well as more domestic related costs such as domestic transportation and other fuel are all relatively low compared to those other 2 primary items, the international freight and commodities.

And that concludes our Q&A session for today. I will turn the call back over to CEO, Mike Kaufmann for closing remarks.

I want to thank everybody for taking the time to be on the call today and for all of your questions. I'd like to conclude with just a few thoughts. I know the elevated product costs within the Medical Segment carried a lot of attention here today. But I want to just reiterate that, 1. We do believe the majority of these costs are temporary. 2. That we're taking aggressive enterprise-wide actions to help mitigate. And 3. We did reaffirm our non-GAAP EPS guidance. Additionally, in Pharma, we are encouraged by the profit growth we saw in the quarter, and the ongoing resiliency in this business. With an additional $3 billion share repurchase authorization and our commitment to our dividend, we are positioned to return capital to shareholders while prioritizing investment in our growth businesses, simplifying our operating model, and strengthening our core businesses. And together this gives us confidence in achieving the new long-term growth targets that we provided. With that, thank you again. We hope you all have a good day.

And this concludes today's call. We thank you again for your participation. You may now disconnect.